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What Is Dell's Deal?

Dell is coming under pressure to shift its strategy. Could SMBs, storage M&A provide the answer?

ROUND ROCK, Texas (

TheStreet

) --

Dell

(DELL) - Get Dell Technologies Inc Class C Report

, faced with increasingly stiff competition and an uncertain PC market, is at a crossroads. The tech giant is scrambling to catch up with

Apple

(AAPL) - Get Apple Inc. Report

and

Research In Motion

(RIMM)

in next-gen consumer products

, and enterprise giant

HP

(HPQ) - Get HP Inc. Report

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recently thwarted its attempt to buy storage specialist

3Par

(PAR) - Get PAR Technology Corporation Report

.

Analysts and other tech watchers are raising questions about Dell's long-term strategy, which relies heavily on resold technology from the likes of

EMC

(EMC)

,

Oracle

(ORCL) - Get Oracle Corporation Report

and

Brocade

(BRCD)

.

"Dell is not in the greatest position," Joel Achramowicz, senior vice president of research at investment bank Blaylock Robert Van, told

TheStreet

. "The company is more like a distributor than a technology company -- they put very, very little in R&D."

Dell certainly lags behind other tech bellwethers in terms of research dollars spent. The PC maker spent $624 million on R&D in fiscal 2010. Compare that with

Microsoft

(MSFT) - Get Microsoft Corporation Report

, which spent $8.7 billion over the same period and

IBM

(IBM) - Get International Business Machines Corporation Report

, which forks out around

$6 billion annually

. HP, Dell's biggest PC rival, spent $2.82 billion on R&D during its last fiscal year.

>>Dell At the Crossroads

"R&D is directly correlated to margin," said Achramowicz, who has a neutral rating on Dell. To illustrate his point, the analyst compared Dell's 16.6% gross margin to IBM's, which was 45.7% during the last fiscal year.

"Dell needs to increase its R&D spending and try to become an innovator, because it is very hard to remain a tech player if you are not an innovator," said Kaushik Roy of Wedbush Morgan, in an email to

TheStreet

. "If they can provide innovative products, Dell's margins would improve."

A Dell spokesman refused to comment on what the company expects to spend this year on R&D, but said in an e-mail to

TheStreet

that "most of our R&D is enterprise-related, so when you look at it relative to enterprise revenue, it compares pretty reasonably with many competitors."

Dell, which recently launched

tablets

and

smartphone

, has vowed to boost its margins through improved component costs and greater efficiency in its consumer business. Analysts, however, are urging the firm to shift its entire strategy.

"They need to get out of the reseller mode," said Brian Marshall of Gleacher & Company. "They need to focus on the small-to-medium-sized business market -- no big enterprises are going to buy from Dell; they are going to buy from HP,

Cisco

(CSCO) - Get Cisco Systems, Inc. Report

or IBM."

Jayson Noland of Robert W. Baird also feels that Dell is fighting a losing battle in the enterprise. "I tend to agree about Dell focusing on something such as SMB or healthcare," he said. "It's hard to imagine Dell successfully competing with Cisco, Oracle and IBM in large enterprise."

In terms of IT spending, the U.S. SMB market is said to be worth $55 billion, a big opportunity for Dell, which grew its SMB business 25% during the second quarter. Rivals like HP, though, which has said it holds between 15% and 20% of the market, have also been ramping up efforts in this space.

Analysts are also pointing specifically to storage M&A as a way for Dell to up its game, especially since it lost out to HP on 3Par. "The margins on storage and networking are significantly better than in PCs and servers," said Roy.

Compellent

(CML)

,

Isilon

(ISLN)

,

CommVault

(CVLT) - Get CommVault Systems, Inc. Report

,

FalconStor

(FALC)

and Brocade could all be attractive targets, he said, along with private players

DataDirect

,

BlueArc

and

Xiotech

.

Achramowicz and Noland agree that Compellent, CommVault and Isilon would be prime M&A fodder, although Achramowicz adds that

NetApp

(NTAP) - Get NetApp, Inc. Report

could also be a good fit, as well as networking firms

Juniper

(JNPR) - Get Juniper Networks, Inc. Report

and

Citrix

(CTXS) - Get Citrix Systems, Inc. Report

"

But NetApp and Juniper are $20 billion companies, and Citrix is also very pricey," he added.

Dell could also streamline a few things internally to boost performance, according to Gleacher & Company's Marshall. "Their supply chain is over $40 billion a year," he said. (Marshall has a neutral rating on Dell shares.) "If they were to cut just 1% of that, it would be about 15% accretive to quarterly EPS."

The computer maker earned 32 cents a share in its recent second-quarter results, although this comfortably beat

Wall Street's estimate

of 30 cents a share. Analysts surveyed by Thomson Reuters expect Dell to earn 33 cents a share during the third quarter; the company next reports earnings in roughly a month.

On the personnel side, Marshall noted that CEO Michael Dell might want to think about recruiting

Todd Bradley, who runs HP's personal computer business

and was widely tipped as the successor to former CEO Mark Hurd.

"If I were Michael Dell, the first person I would have called when

Leo Apotheker

was appointed at HP CEO would have been Todd Bradley," he explained. "Todd has done a good job in HP's PC business over the last five years -- he runs a business that's almost as big as Dell."

Whether or not Michael Dell opts to bring in new blood, grab another storage company or focus on small businesses, one thing is certain: The tech giant, whose stock is down almost 8% this year, is fast approaching a fork in the road.

Dell shares were trading slightly down in pre-market trading, losing 10 cents to $13.63.

--Written by James Rogers in New York.

>To follow the writer on Twitter, go to

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.

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